Core inflation rate rose to 2.9% in July, as expected, key Fed measure shows

Key Concepts:

• PCE (Personal Consumption Expenditures) report: A measure of inflation based on consumer spending.
• Core PCE: PCE excluding food and energy prices, considered a more stable measure of underlying inflation.
• Month-over-month (M/M): Change in a variable compared to the previous month.
• Year-over-year (Y/Y): Change in a variable compared to the same month in the previous year.
• Trade Balance: The difference between a country's imports and exports.
• Wholesale Inventories: Goods held by wholesalers for resale.
• Retail Inventories: Goods held by retailers for sale to consumers.
• Yields (2-year, 10-year Treasury): The return an investor receives on a bond.

PCE Report Analysis

• Personal Income and Spending: Personal income rose by 0.4%, matching expectations and marking the strongest increase since April's 0.8%. Spending also increased by 0.5%, aligning with forecasts and representing the best performance since March's 0.7%.
• Real Spending: Accounting for inflation, real spending showed a solid increase of 0.3%, meeting expectations and surpassing the previous month's 0.1%. This was the highest since March.
• PCE Inflation (Month-over-Month): The PCE on a month-over-month basis increased by 0.2%, matching the rate in May. A lower number would require going back to March when it was zero. This indicates progress in controlling inflation.
• PCE Inflation (Year-over-Year): The year-over-year PCE inflation rate was 2.6%, precisely as expected.
• Core PCE (Month-over-Month): The core PCE, excluding volatile food and energy prices, rose by 0.3% month-over-month, in line with expectations.
• Core PCE (Year-over-Year): The core PCE year-over-year came in at 2.9%, as expected. However, this was slightly higher than the previous month's 2.8%. A 2.9 would be in line with the 2.94 in February, or the 2.97 in March of last year. This is the only inflation metric that was slightly warmer than the previous month.

Trade Balance and Inventories

• Trade Balance: The trade balance showed a deficit of $103 billion, worse than the expected -$90.2 billion. This deficit was the largest since March, which had a record deficit of -$161 billion (the largest since record keeping began in 1989). This indicates a negative trend.
• Wholesale Inventories: Preliminary wholesale inventories for July increased by 0.2%.
• Retail Inventories: Retail inventories for July also increased by 0.2%.

Market Reaction

• Treasury Yields: Prior to the report's release, the 2-year Treasury yield was at 3.64%. It then decreased to 3.63%. It closed at 3.70% last Friday. The 10-year Treasury yield was at 4.22% and is now at 4.21%, unchanged from yesterday's late cash market close. However, it closed at 4.26% last Friday. Yields are lower than last Friday's close.
• Technical Analysis: The low yield in 10-year Treasuries yesterday was around 4.20%, which held today. This level is critical for technicians to watch.

Conclusion

The PCE report presented a mixed picture. While income, spending, and real spending met expectations, and the overall PCE inflation figures were as anticipated, the core PCE year-over-year showed a slight increase, indicating persistent inflationary pressures. The trade deficit worsened, while inventory levels increased slightly. The market reaction was muted, with Treasury yields showing a slight decrease. The 4.20% level in 10-year Treasury yields is a key level to watch for technical analysts.